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Monday, May 01, 2000

This week I happened upon the www.freetrade.org site and found an interesting article titled “The Truth About Trade In History” by Bruce Bartlett. The gist of the article is succinctly captured in the opening lines. “Pat Buchanan contends that the United States grew economically strong and prosperous because of trade barriers. … It is more accurate to say that the country grew in spite of import restrictions.”

I felt this article pushed home many of the ideas discussed in this week’s readings and thus would make a good review candidate. Bartlett quotes Buchanan as attributing nearly the entire past economic success of the US to “the success of the policy called protectionism that is so disparaged today.” Well, as they used to say, “them there are fighting words” especially for discussion in a class on International Economics!

Impact

After such an attention getting opening, Bartlett proceeds to complete a quick review of trade history setting the stage for his summation that protectionist policy has not been the source of the US’s strength. Along the way, he touches on the top level of each of the tariff definitions discussed in this week’s text.

Bartlett begins with the British and their mercantilistic approach to the American colonies where the “mother country expected to gain materially from all colonial trade.” This not only forced a great burden on the colonies but ultimately it contributed significantly to the Revolution itself.

The article then notes that the first US Congress adopted tariff of 1789 was simply meant to raise revenue for the government. It was not until 1816 when the Congress adopted the first “explicitly protectionist tariff.” From that point forward until the 1930’s a protectionist attitude prevailed.

Bartlett cites economist Frank Taussig whose work found that the tariffs of the early 19th century did nothing to fundamentally advance the economy of the US. From this conclusion, Bartlett points out how Taussig questioned the feasibility of the infant industry argument. Bartlett then confirms the weakness of the infant industry protectionist approach by quoting its ineffectiveness and high degree of likelihood that it would transform into a permanent duty as per the work of Gottfried von Haberler.

Skipping forward, Bartlett then argues that tariffs, especially the Smoot-Hawley tariff of 1930 if “not the single cause of the Great Depression, … certainly made a bad situation worse.” The only saving grace from that period Bartlett claims, is the memories (read nightmares) of the Smoot-Hawley tariff and the way it has kept Americans committed to a free-trade policy for the 60 years since the Depression. His fear however is that today’s prominent politicians such as Buchanan and Ernest Hollings, who proudly wear their protectionists views, are threatening a return to a protectionist past that did not work then and will not work any better today.

These popular leaders along with the likes of Ross Perot, raise protectionist issues on an emotional appeal basis which rings like music to many American voters’ ears. Some attribute this shift to a dwindling understanding of and support for true free-trade which has taken place since the mid-1980’s. The reality is that the case for free-trade needs to be re-sold to the American public based on it’s outstanding record. The result of which includes an annual world trade level which has grown from around $100 billion in 1960 to some $3 trillion today while average worldwide tariffs have fallen from around 40% to about 4% today.

Summary

In putting this review together, I realize that I have recapped the article more than the syllabus suggests. However, I thought the content made a great extension of the week’s readings. I also thought it made a solid reminder of the need to really focus on being “pro-trade” in our day-to-day business dealings in spite of the short term advantages dangled in front of us by those professing the potential power of protectionist tendencies. Like churning out dot.com ideas to simply take advantage of a short term supply and demand imbalance in the public financial markets, seeking or accepting tariff protection can fuel the same bubble about to burst syndrome.

As Edward Hudgins points out in his article entitled The Fundamental Freedom to Trade, “countries do not trade, individuals do.” And so it is on the backs of those individuals who pursue the acquisition and subsequent sale of goods everyday to remember to push their political systems for solutions which enable rather than restrict the growth of the world economy. The answer must lie in building solid, profit-making businesses and embracing (almost fanatically) the notion of free trade and the required role of the individual.

Saturday, April 22, 2000

The article I selected this week I found in the archives at Fortune Magazine’s web site while doing some research earlier in this course. Entitled “Asia’s Meltdown” by Jim Rohwer, the article is a little more than 2 years old. However, I felt it presented a great backdrop for the week’s text as it touches on worker migration flow, IMF rescue programs, money supply shifts, and interest and currency risks (oh my!).

Synopsis

Rohwer links the Asian Meltdown to the trilogy of “debt inflation, excessive private-sector leverage, and weak financial systems.” The three have combined to make for a particularly messy situation which Singapore Prime Minister Goh Chok Tong calls “Asia’s worst crisis since the Second World War.” Regardless of the analogy though, it seems clear that the Asian financial crisis may domino through the rest of the world if solutions aren’t found and found quickly in spite of the fact that there really is no “quick fix.”

The IMF’s efforts to date, have been largely ineffective mostly, because of Asia’s “structural rigidities such as monopolies and the absence of workable bankruptcy laws.”

Additionally, compounding the currency collapse many in the region have experienced, is the fact that any bank workout will be “hard to manage because three kinds of risks have become entangled and reinforce one another.” These three risks include interest rate risks, currency risk, and credit risk. The interest rate risk comes from the huge amount of short term borrowing which was invested for long returns. The currency risk can best be understood via the plummeting valuation of various regional currencies which has, at the extreme end, culminated in corporate sectors in Indonesia for instance, actually having negative equity.

All of this is further complicated by the “dollarization” of the world economy which is forcing the Asian companies to “meet the standards of corporate and financial performance set in the U.S. This dollarization process was previously part of the region’s ability to lend stability to their own currencies. On the downside however, many of Asia’s banks and companies had the incentives to borrow heavily in dollars. The problem with this was that as the currencies of the region collapsed, the dollar-denominated debts ballooned “as much as fivefold” and the debtors found themselves unable to continue repayment. Coupled with the “strong aversion throughout Asia … to acknowledging losses and cleaning them up” such heavy debt related issues are far from being readily resolved.

Impact

If there is any positive theme in this crisis, beyond the long, long term benefit of the lasting impact of dollarization as to forcing the efficiency and productivity improvements of having to match the U.S. standards, it might be found in how the crisis coerces regional leaders to step forward.

China, “often seen as Asia’s last bulwark” may be the region’s “best hope.” Given the Chinese yuan’s “closed capital account” the currency’s stability versus the rest of the region may give it the power necessary to forge forward in this time of regional trouble. While it’s true that “China’s leaders are engaged in a tricky process of trying to reform their debt-laden, state-owned enterprises and banks… if China survives the crisis with its currency intact, its regional influence would be mightily enhanced.” In Rohwer’s opinion, if China remains stable, the Asian crisis is far less likely to become a global one.

Summary

Though it is difficult to draw a direct relationship to my work at Sony versus the Asian Meltdown, I particularly enjoyed the manner in which this article pulled together so many of the lesson from the text. With that said, the fact that Japan in general could truly spark part of the solution for the region is something that many within Sony Japan’s management recognize.

If in fact Japan can “loosen fiscal and monetary policy” adequately so as to enable their own economy to continue growing, then Asia in general could begin to grow again. This is mostly because “Japan is the economy that Asia depends on most for trade and investment flows.” Sony management does recognize this and the Chairman, Norio Ohga has been fairly vocal in calling for reform.

Regardless of the outcome, the situation in Asia should very clearly show that we are all members of the same planet. Further, today’s "wired" world is eliminating many of the previously segmented economic sectors in such a manner as to give each region a direct and definitive interest in the other.

Monday, April 17, 2000

The article I selected this week came out of the archives at Fortune Magazine’s web site. Entitled “Why the Global Storm Will Zap the U.S. Economy” by Jim Rohwer, the article is about 1 ½ years old. However, it speaks to a coming economic crash which seemed a particularly appropriate topic after Friday’s huge sell-off in the U.S. markets. What’s more, since the article touches on dollarization, commodity pricing, the IMF, the Euro, capital flows, and deflation, it seems to be a grand mix of topics given this week’s text assignment!

Synopsis

The bottom line for this article is the author’s belief that the “global deflationary wave let loose by the Asian financial crisis” of 1997/1998 will “weaken Japan even further, demolish Russia, shake Latin America, and threaten Europe and the United States.” With that said, while many might jump to the conclusion that this is a ‘gloom and doom’ story, Rohwer goes on to prophecy that it is instead a positive long term situation if patience can but win out.

At the root of the pending negative boom that is only now being lowered around the globe is the “imposition of ruthless American standards” of “technological and corporate efficiency that is forcing almost everybody … to conform or die.” This imposition, according to Rohwer is a deflationary force in the early stages but it will by definition, “after the coming crash” lead to a “great world [positive] boom as the standards pioneered by the U.S. become those by which all companies and economies are judged.”

Rohwer’s reason for why something that is currently a U.S. benefit will become a U.S. problem can be summarized in two broad points.

· The first is his view that “nobody has given a very good explanation for financial contagion--why the collapse of one country's markets should send the markets of other, mostly unrelated, economies down as well—but there is no doubt the process exists. The world has already seen an awful lot of this contagion, and there is no reason why it should suddenly stop at the threshold of the rich West.” Thus, the U.S. markets will suffer what the Asian nations have been dealing with already though on a delayed time reaction of up to two years.

· Secondly, Rohwer points out (what the markets proclaimed on Friday the 14th) that such contagion driven collapse will “find a nice, ripe host in the U.S. economy and its overvalued stock markets. One consequence of our seemingly unending boom in the economy and the stock market is that companies have made massive capital investments based on little more than the expectation of an unending boom in the economy and the stock market.”

What’s more, Rohwer points out that “American households, never known for their thrift, are now saving virtually nothing: They're counting on their mutual funds, which these days contain more of America's financial assets than the whole banking system. The effect of a Wall Street slump on household wealth and consumption would be enormous.” Such a slump, while nasty enough a shock to the system in its own right, could be (almost certainly) exaggerated by governmental action. (My greatest personal fear by the way!)

The way out of this mess, is the process Rohwer defines as dollarization whereby the rest of the world accepts and then implements increasing “technological and corporate efficiency” (as the U.S. has been doing). This process will be kicked off by increasingly freer flowing capital and a “bipolar currency world” where the “American pole will have a lot more magnetic attraction than the European” one.

Impact

On a personal level, such a scenario will obviously impact my immediate line of work as Sony will be forced to contend with the impact of any such world-wide deflationary situation. At the same time, this might not be for the worst as I’m in a field that should be contributing heavily to the anticipated “transmission of American standards of efficiency to the rest of the world.” Of course, the new economy part of that contribution will see its valuation and hence flexibility whacked if the author is correct, but even that might create opportunity for a company such as Sony if it possesses the boldness to move forward and seize the moment. Additionally, a collapse in wealth-effect spending could slow demand for Sony products which are fundamentally not required elements of living in spite of our marketing preferences!

However, on a truly personal level, changes in markets and the type of deflationary pressures I’m apt to deal with as an individual should be pressures I can ride out. With no extraordinary debt and adequate (I hope) time until retirement, I would expect to muddle through Rohwer’s storm to land safely on the other side. I may think twice about investment strategies, perhaps favoring Europe a bit more as Rohwer figures the “Euro project, backed by great reserves of wealth, may allow it to preserve a regime of social protection and relative economic inefficiency that nobody else will be able to afford.” But of course, since expectations and realities rarely have a habit of matching, I really don’t take much solace in my own conclusion. In actuality, I must be content in knowing that only time will tell of the impact of Rohwer’s prediction.

Summary

Given the volatility in the markets, the seemingly exorbitant valuations that the “new economy” ventures are seeing, and the debt levels currently being carried, I’m left wondering if Rohwer’s article is an accurate prediction of our current economic game in the 7th inning. If so, I’m all for taking the stretch and then anxiously looking forward to the glorious ending he predicts. A time when “the world's economic efficiency and wealth-producing capacity are radically upgraded” and a time when “the world is going to be a lot better off for it.”

Sources

Rohwer, J. Why the global storm will zap the U.S. economy. Fortune, 09/28/98.

Sunday, April 09, 2000

In searching for articles to review this week, I visited one of my favorite pure browsing sites. Though not a site you might first consider for an International Economics course, I wandered over to www.uspto.gov to see what I could find. This is the web site for the United States Patent & Trademark Office. The search feature of the site is pretty powerful allowing you to search by inventor’s name, patent number, or keyword(s). I’ve used the site for work and (almost!) pleasure but to date I’ve never used it as a source of an article review. Nonetheless, the complete patent filings are an interesting place to fish for ideas so I thought I’d try it for this week’s article review.

At the Boolean search box for the patent database, I entered “currency” and ‘trading’ and of the 53 patents returned, one of them was titled “Foreign Exchange Transaction System.” Invented by S. Rosen, awarded on November 2, 1999 and assigned to Citibank, the 26 page document sets out the basis for a real-time multilateral foreign exchange settlement system designed to eliminate foreign exchange settlement risk.

Impact

Foreign exchange settlement risk or Herstatt risk as it is sometimes referred to, describes the “risk of failure by any of the participants” in a foreign exchange trading transaction during the time lag between the trade commitment and the settlement date. The problem behind this risk was “demonstrated in 1974 when the Herstatt Bank in Germany was declared insolvent at the end of the banking day” leaving any pending trades in the lurch.

Because “foreign exchange trading is by convention settled two business days following the trading day” if the “counterparty to the Herstatt Bank had paid his marks and had not received his dollars” prior to the insolvency announcement, then said party’s German marks could be forever lost. Given the settlement timing gap, further exacerbated by the fact that Germany is seven-ten hours ahead of the US banks, there is a definite opportunity for risk to come into play and this “has the central banks of the major economies concerned.”

What the patent purports to enable is the development of a real-time exchange of currencies via a form of electronic money which can be denominated in multiple monetary units via a secure electronic network. Such an approach could eliminate the risk as opposed to merely reducing the risk as suggested by various industry studies touting “solutions incorporating extended banking hours, coordinating central bank accounting systems, and setting up multi-currency clearing banks.” Such a technology driven solution, if secure, could work as it solves the problem by attacking at the root cause and eliminating the time lag of the current systems.

Summary

The text walks through the basics of foreign exchange trading describing the existing systems, including some of the inherent risk points. Additionally, the NY Times article I posted earlier today exposed a related risk factor due to the lack of real time information in trading systems today. When combined with the text’s explanation of triangular arbitrage, I found myself drawn to this patent as means to improve upon the trading process in its entirety via a real-time system. As is usually the case, information is the key to success. This is especially so in the trading arena where timely availability of that information can produce fortunes or loss.

This patent application offers an interesting means of outlining the need for change in the manner in which foreign currency exchanges occur. While obviously beneficial to Citibank given the protection of the patent process, the benefit to the market and its participants in providing more timely and thus more perfect information could raise the efficiency of the market at large.

Though it may be highly unusual to attempt to tie together an economics text, a NY Times article, and a US Patent, I enjoyed the challenge and found it to be quite interesting!

Sunday, April 02, 2000

After pondering this week’s article choice for a couple of days, not sure how I could find an appropriate article to offer a discussion on the economic integration of the European Union (EU), I decided against worrying (in other words, I decided to procrastinate!) and I sat down with the Sunday NY Times (one of my favorite Sunday activities). Luckily for me, I came across an article entitled “Is the Dutch Advantage Unsettling Europe?” by Andrew Ross Sorkin. You can find it online at http://www.nytimes.com/library/financial/Sunday/040200biz-holland.html though you’ll have to complete a one-time registration process to gain access to it.

The article begins by suggesting that the Netherlands is the Delaware of Europe and as such is “the place” for companies and wealthy individuals to set up shop. Gucci, Swatch, and the Rolling Stones are all Dutch entities. The article also immediately suggests that the primary reasons for setting up shop in the Netherlands may finally be forced into change as the EU’s “instinct to level every playing field” comes into being.

Currently, almost 60% of all foreign headquarters in Europe are in the Netherlands with “more than 6,800 foreign companies setting up shop” there. This is one of the reasons why the Netherlands receives more “American investment than any country except Canada and Britain”.

At the root of such popularity with foreigners is the country’s tax and legal flexibility. Especially the tax system which allows expatriate employees of the foreign corporations located there to only report 65% of their income for tax purposes. Additionally, the tax law “exempts dividends and capital gains from foreign subsidiaries making the country an ideal home for holding companies” and “considerable freedom exists in adopting a suitable system, to calculate taxable profit.” Three attractions sure to appeal to any business person!

Though the Dutch take these tactics in stride as simply part of their “trader” heritage, others in the EU have stressed the “traitor” viewpoint of such actions in creating an unfair advantage versus others in the EU.

Impact

I believe it will be difficult for the EU to ever truly strip the Dutch of their “pro-business” mentality. Tradition is a powerful thing to change and this is simply one more of the many traditions the EU is working hard to change and unify.

As a business person considering how best to serve customers throughout Europe and the Middle East, I can relate first hand to the attractiveness of the Netherlands. While working in the satellite business out of the Bay area, we entertained proposals from many parties as to how best to expand beyond San Jose and open our first International office. We wanted a better way to access and feel the pulse of our European and Middle Eastern markets and customers. (We subsequently decided that the Middle East was a completely separate issue and developed arrangements in Dubai, UAE and Cairo, Egypt).

As it turned out, we decided that our European customers could be served from a single base out of the Netherlands. From there we were able to quite readily approach the UK and Germany (two of the biggest satellite markets in Europe) as well as other European markets. As an aside, we also found the Netherlands conducive to doing business in South Africa which, at the time, was just beginning to open up as a satellite reception marketplace.

For our operation, the Netherlands turned out to be ideal for many reasons including a strong can-do attitude, superb multi-lingual (out of necessity) skills and flexible tax and business arrangements as pointed out in the article.

Summary

Having been responsible for the office outside of Amsterdam and having been to the Netherlands on numerous occasions, I can personally attest to the can-do, pro-business approach the Dutch people (in general) bring to their operations. At the same time, I’ve also seen first hand what I recognized as the relatively less than pro-business atmosphere and approach (in general) of folks in France, Spain, and the United Kingdom (in that order). With this comment, I don’t me any disrespect. It’s just that I definitely recognized a difference in how business was prioritized in the day to day world as I traveled from country to country.

The goals the EU has set for itself are challenging and far reaching. However, as the text and lectures postulate, leveling the playing field as to tariffs, tax laws, and other trade barriers will go a long way in creating “one” market. In spite of this “paper” leveling though, the natural (perhaps cultural) advantage of the EU’s individual members such as the Dutch will continue to challenge the region’s true unification and therefore economic integration progress.

Saturday, March 25, 2000

This week’s article caught my eye while browsing the NY Times. Titled “If You Think Last Week Was Wild …” by Gretchen Morgenson, you can find it at www.nytimes.com (though you have to register to view it). Fundamentally, the basic premise put forth was that the supply and demand for Internet stocks is poised to do an about face. While the market has chased a limited number of Internet stock offering shares to ever higher levels of valuation, a building change in supply will dampen this demand enthusiasm substantially. This of course will be much to the dismay of individual technology stockholders as well as raging a potentially negative effect on the NASDAQ overall.

By Morgenson’s accounting, “in the next three months, some 2.4 billion shares of stock in last year’s new issues … will be free to enter the market.” From a supply and demand standpoint, this is more than twice the current number of shares of these stocks available on the market today. As I read the article, I couldn’t help but try and factor some of the week’s readings against the article’s prediction! If Internet stocks were truly a scarce commodity, with the run up in prices indicative of demand, then a major change in supply as outlined in the article would certainly make a very interesting natural “trade theory” case for our consideration.

Impact

After reading the article, I sat down with the text and started re-reading it for points of connection. The first I came upon was the classical economists behavior factors of production. If one thinks about the Internet craze and the early public stock offerings, a common element of many of these firms was their location in the Silicon Valley region. (Land is one of the classical factors of production.) Proof that factors would migrate in response to a location trend is evident in the number firms (and people individually) who migrated to Silicon Valley primarily because that was “the place” to achieve the best “trading” possibility in the Internet environment.

Next, the writings about the “price elasticity of demand” and both the idea of consumer and producer surplus also had to come to mind. As did countless stories of individual wealth, as well as stories of companies formed purely (seemingly so) to take advantage of the market (so to speak). Then, in that same section of course, was the definition for “arbitrage” which simply cuts to the core of the market mania subject itself!

Half way through the week’s readings I then happened upon the headline “What If Trade Doesn’t Balance?” Gee, that seems to be a better headline for the article than what the NY Times chose! On the next page though, I had to consider the notion of “comparative advantage” and how a firm gains on the value of its perceived advantages and then gains again when it acquires those skills lacking in its quiver. The market certainly responded in this fashion time and again for the Web aggregators ala CMGI.

Later, when reading of China and the fact that “fears seem to be greater in the government than in the population at large,” I couldn’t help but think about DoubleClick and the way they’ve been trounced upon by lobbyists and special interest groups everywhere but not necessarily trounced upon by consumers at large. (OK, you might think it a stretch to register this point in this paper but I spent too many hours today on the privacy debate issues!)

Then of course, along came Chapter 4 aptly titled “Who Gains & Who Loses ….” (If I only knew the answer to this one I could act profitably on Morgenson’s siren call.) More seriously though, the discussions on specialized factors and their impact on trade, especially the impact of endowment factors, all seemed to call out to be compared to the Internet stock, supply & demand quandary.

Lastly, I was reminded of the issues and potential for governmental intervention and it’s impact in trade progress. The same thing could relate to the market when these hot stocks have to go through all the necessary due diligence to be offered to the market to begin with. Even after a stock has floated, regulations then kick in restricting the trade if certain parameters fail to continue meeting with regulatory approval. Even on the Net, at least when it comes to stock, regulations prohibit truly free trade!

All of this is relevant to my own job as my small team sought to fund an Internet project within a major corporation. A true Intra-preneurial effort! Our first approach was to do so as a division of one of the marketing companies within Sony. Now we’re gearing up to be an independent subsidiary. All the positioning is in part in order to take advantage of the same market forces of supply and demand to which these very stocks are responding. Before this class is complete, our group’s basic structure should be in place. It will be interesting to see how the market (internal and external) responds to us at that point in time. I only trust (hope) that there is truth in the saying that “trade is a positive-sum activity” and thus we can count on rising with that tide!

Summary

In addition to being a launching pad for thinking about “trade theory” I should also pass along the article’s summation. Morgenson put forth that 75% of all early venture offerings typically fail. Further, since institutional investors typically own only 10% of an offering nine months after the initial float, it will be the individual investors (such as ourselves) who “will be left holding the bag” when the fresh supply shows up to satiate demand. Buckle your seat belts folks … there may be turbulence ahead!

Saturday, January 08, 2000

My article of choice this week was found at the New York Times web site and titled What Happened to the Asian Century? by Ian Buruma.

In this article, Buruma questions the ‘common knowledge’ that had only fifteen or so years ago, warned the American public that the “Asian’s were coming.” Given all the real estate buying, American auto industry domination, and even novel’s such as Michael Crighton’s Rising Sun, it was clearly apparent that the end of the century and perhaps the whole of the new century would belong to Asians, particularly the Japanese. However, given the mid-late 1990’s rupture of Japan’s bubble economy and the steep slump seen in most all Asian markets, as we head into the 21st century it seems of ‘equal common knowledge’ that America rules.

Why is the obvious question. As Buruma points out, one need only realize that the Silicon Valley drivers (which seem responsible for much of the “new” American success), come to the USA from Korea, China, India, and more. From there it’s only a short leap to understanding that if those same success drivers can create such wealth along with their American counterparts in the USA, then perhaps they can also create such success in their own home countries. So, perhaps the only holdback is the state of democracy, freedom, and diversity in those home countries.

Buruma suggests that the most talented individuals will always flock to locations that support a free democracy and a diversity of people and ideas. To that end, Buruma questions whether or not Japan, Korea, or others will be able to become the powerhouses once believed to be their near birthright. Though signs of freedom and democratic change are emerging in many areas of Asia, true support for diversity may be the success key that simply doesn’t materialize in most of Asia. Especially the lack of diversity support in such homogenous cultures.

From this argument, one could conclude that next to a free democracy, which much of the world is beginning to pursue or even emulate, it is the willingness to support a true diversity of people and ideas that will enable the real economic powerhouses of the 21st century.

Resources

Buruma, I. (1999, December 29). What happened to the Asian century? [Online].Available: http://www.nytimes.com